Why stocks still cheap, despite new highs: Siegel

Jeremy Siegel, Wharton School professor, explains why the "big news" this year is interest rates. The forces weighing rates down go way beyond the Fed, says Siegel.

The stock market has not adjusted to the new environment of slower economic growth and low interest rates, Wharton professor Jeremy Siegel told CNBC on Wednesday. And perhaps counter-intuitively, that's a bullish sign, he added.

"It's still selling at the 15 or 16 [price-to-earnings ratio] that we've had for a 100 years when interest rates were 5, 6, 7 percent," Siegel said in a "Squawk Box" interview. Even at a 10-year Treasury yield as high as 3.5 percent, that's "historically low" relative to stocks, making the market still cheap at these levels, he said.

The S&P 500 and the Dow Transports closed at record highs again Tuesday, while the Dow Industrials finished within 40 points of a new high to start the Memorial Day holiday-shortened trading week.

The 10-year yield, currently around 2.5 percent, has been bucking many of the predictions at the beginning of the year of higher rates, as the Federal Reserve scales back its bond-buying program and considers whether to start increasing interest rates.

But Siegel said that falling bond yields are not the result of concern about economic growth and the Fed—a reason given by many economists.

He attributes the trend to other factors, reiterating a laundry list from aging baby boomers and pension funds looking to reduce risk to the government issuing fewer bonds now that the deficit has become a little more manageable.

Under that scenario Siegel described earlier this month that he believes bonds and stocks can go higher. He said he's sticking by his prediction of 18,000 on the Dow Jones Industrial Average by year end. It closed Tuesday at 16,675.50.

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